The Bank of Canada will have to grapple with an underperforming economy, signs of a returning consumer and a “dark cloud” hanging over the nation’s trade prospects as it gears up for its final interest rate decision of the year.
Canada’s economy did continue to grow in the third quarter, Statistics Canada reported on Friday.
On an annualized basis, real gross domestic product rose one per cent between July and September, according to StatCan. That marks a slowdown from 2.2 per cent annualized growth in the previous quarter.
The results undershot the Bank of Canada’s call for 1.5 per cent annualized growth in the third quarter, which had already been revised down from an earlier forecast of 2.8 per cent.
StatCan pointed to increased consumer spending, particularly on new trucks, vans and SUVs. Spending was also higher across all levels of government in the third quarter, the agency said.
And while consumer spending was credited with keeping the economy afloat in the period, StatCan said that households were saving more overall. The net household savings rate rose in the third quarter as disposable income (up 2.3 per cent) rose at nearly double the rate of spending (up 1.2 per cent).
RSM Canada economist Tu Nguyen said in a release Friday that signs of returning consumer confidence will power the holiday shopping season, supported even more by the federal government’s GST/HST “holiday.”
The upcoming tax break, proposed stimulus cheques from Ottawa and the Ontario government in the new year and expectations for more interest rate cuts from the Bank of Canada all put a bit of shine on the consumer outlook, noted BMO chief economist Doug Porter on Friday.
“Of course that somewhat sunnier domestic outlook is looking up at the dark cloud of trade uncertainty,” he said in a note.
The “dark cloud” he’s referring to are threats from United States president-elect Donald Trump to impose 25 per cent tariffs on all goods entering the U.S. from Canada and Mexico unless his demands on border security are met. Such a move would have a deep impact on the Canadian economy, which relies heavily on the U.S. export market, though the proposed tariffs are still just threats.
Assuming the tariffs are not implemented, Porter expects the Canadian economy will rebound with two per cent GDP growth in 2025.
Dragging down GDP last quarter was a slower accumulation in business inventories and a drag on investment into machinery and equipment.
Housing investment meanwhile saw its first quarterly jump higher since a year earlier. That was thanks to a rebound in activity in the resale market, while investment in new home construction and renovations declined.
Markets raise bets for half-point rate cut
StatCan said that real GDP per capita was down 0.4 per cent in the quarter, meaning growth on a per-person basis has now declined for the sixth consecutive quarter.
On the other hand, the latest quarterly results included broad upward revisions to real GDP dating back the past two years. CIBC senior economist Andrew Grantham said in a note to clients that, all told, GDP now appears 1.4 per cent higher since the second quarter of 2022.
The Bank of Canada has reduced its policy rate by 1.25 percentage points since June as its concerns shifted from taming price pressures to stimulating the economy and ensuring inflation doesn’t drop too far below two per cent.
On a monthly basis, real GDP was up 0.1 per cent in September, while StatCan’s early estimates for October show the same growth expected for that month, though the agency cautions those figures may be revised.
Grantham said that if this growth trend continues as expected, the economy could be on track for another one per cent annualized growth to close out 2024, which would again fall short of the Bank of Canada’s call for a rebound in real GDP of two per cent growth.
Together, the latest figures show that the Canadian economy is trending weaker than the central bank expected when it published its most recent forecasts a month ago, Grantham said.
— with files from Reuters
He said that strengthens the argument for a second oversized interest rate cut of half a percentage point at the Bank of Canada’s final decision of the year on Dec. 11, though he added that upcoming November jobs data next week will likely have more to say in the size of any drop.
A bigger-than-expected jump in the annual inflation rate for October and expectations that the U.S. Federal Reserve may not cut its own benchmark rates as quickly have helped to rein in expectations for the Bank of Canada’s easing cycle in recent weeks. TD Bank removed one interest rate cut from its 2025 forecast this week amid expectations that government stimulus will reduce the level of relief needed from the central bank.
Currency markets boosted their bets for a 50-basis-point reduction in interest rates next month to around 44 per cent from 31 per cent before the data were released, according to Reuters.
Porter on Friday cited the “hefty upward revisions” in his justification for a return to a 25-basis-point cut in December. Nguyen, noting the weakness of the loonie since Trump’s re-election and tariff threats, also put her weight behind a quarter-point cut next month.